Latest CPI Report Is a Huge Relief for Investors, Says Santos of JPM Asset Management

JPMorgan AM’s Gabriela Santos says the latest CPI print could keep the Fed on hold, reducing pressure for near-term rate hikes. She also argues AI infrastructure buildouts are squeezing software companies’ budgets and that upcoming tech earnings will be key for the market’s next move. Net: guidance on rate path is stable, but AI stock volatility suggests investors should remain selective.

Analysis

Sticky inflation matters here mainly because it prolongs a high real-rate regime, which is hostile to long-duration tech valuations even if earnings are still growing. The market should separate true AI infrastructure beneficiaries — semis, networking, power/thermal, and a few hyperscalers with balance-sheet capacity — from software names where AI is being funded by slower seat growth, heavier discounting, or longer payback periods. That creates a cleaner relative-value setup than an outright index call.

The second-order risk is budget displacement: if CIOs and CFOs are reallocating spend toward compute and away from application software, the pain shows up with a lag in renewal rates, net retention, and forward billings rather than in the current quarter. That makes the next earnings cycle the real catalyst; if management teams defend margins by cutting opex instead of accelerating AI monetization, multiples can compress further over 1-3 months. Conversely, any sign that AI is additive to total software budgets would reverse the recent underperformance quickly.

Contrarian view: consensus may be overestimating how much immediate cannibalization AI causes in software. A lot of current infrastructure spend is additive and mission-critical, while most enterprise software remains sticky enough that cuts happen only after a sustained slowdown, not on the first wave of AI capex. The key falsifier for a bearish software trade is softer inflation and falling yields; a 10Y move lower would mechanically relieve multiple pressure and force a squeeze in crowded shorts.

Key Decisions for Investors

• Long JPM / short KRE for 1-3 months if CPI remains sticky: JPM has better scale to defend deposit costs and trading revenue, while regional banks are more exposed to funding pressure and CRE. Falsify if a softer inflation print drives a fast dovish re-rate in front-end yields.
• Pair trade: long SMH or ANET / short IGV into the next tech earnings cycle. The goal is to express AI capex reallocation rather than a broad tech view; expect 5-8% relative outperformance if management commentary continues to favor infrastructure over application spend.
• Buy 4-8 week IGV put spreads on rallies as a tactical hedge against multiple compression in software. Best risk/reward if implied vol stays below realized and guidance season shows slower renewal trends; invalidate if software prints stable ARR and better AI monetization.
• Watch-list, not a recommendation: if core CPI cools enough to pull the 10Y Treasury yield materially lower, cover software shorts first. That would be the cleanest reversal signal for the duration trade and should reset leadership back toward higher-multiple growth.